Will Pandora and Spotify and the Internet Ever Figure Out How to Pay Artists?

Music-discovery apps like Spotify and Pandora are free, but they have social costs. Among them: Every six months or so, we get an open letter from an artist who is being cut comically tiny checks for thousands of plays on one service or another. This week, it's musician and label-owner Blake Morgan, who reportedly made $1.62 for 27,900 spins on Pandora.

Having seen enough tiny checks by now -- having heard the arguments that are made on one side and the other after each tiny check hits the blogs for a couple of days -- I'm down to one hypothesis to suggest: The Internet startup business model is especially ill-suited for artists of all kinds. It's hard to pay somebody for music or words or video when your medium-term goal isn't profit, and Spotify and Pandora have never consistently made money.

These companies don't exist to make money. They exist to generate enough revenue to gain more funding. Slate's Matt Yglesias has described the way this phenomenon works with Amazon and its impossibly slim profit margins:

Amazon, as best I can tell, is a charitable organization being run by elements of the investment community for the benefit of consumers. The shareholders put up the equity, and instead of owning a claim on a steady stream of fat profits, they get a claim on a mighty engine of consumer surplus. Amazon sells things to people at prices that seem impossible because it actually is impossible to make money that way. And the competitive pressure of needing to square off against Amazon cuts profit margins at other companies, thus benefiting people who don't even buy anything from Amazon.

It's a truly remarkable American success story. But if you own a competing firm, you should be terrified. Competition is always scary, but competition against a juggernaut that seems to have permission from its shareholders to not turn any profits is really frightening.

As startups, they trade either on the promise of making money later, like Twitter, or the possibility they'll be acquired for billions of dollars by somebody already making money. If they mature, as Amazon did, they destroy more profit than they generate. Spotify's CEO came right out and said last year that "the question of when we'll be profitable actually feels irrelevant. Our focus is all on growth. That is priority one, two, three, four, and five."

Consumers have benefited enormously from this business model. We have more selections than we've ever had at lower prices than we've ever had. It's great for me when I want to buy a TV or some chairs or a huge thing of paper towels.

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I actually used the subscription-only Napster for a while when Best Buy was offering specials on it. The problem with naming your service "Napster" is that you're just reminding people who used the original Napster how easy it was to use.